DEAR BENNY: I want to help my older parents so they can have a more stress-free and comfortable retirement, and believe I am in a position to do so. They have a home in an area where housing prices are actually still increasing, which makes the scenario even more attractive to my husband and me.
Their home is valued at about $250,000. They have an interest-only mortgage with a balance of $115,000. I would like to give them a personally financed reverse mortgage of $115,000 to pay off this first mortgage.
So I would give them $115,000 and set the interest rate at 6 percent. The $115,000 grows for me like a long-term, fixed-rate, compound-interest CD would grow, except I would get no payments of interest or principal until they sold the house or the house was sold because they passed away. They would make no payments so long as they were living in the house and I could not/would not get back my investment or interest until the house was sold. Is this correct?
For someone who has the funds to invest and is looking for a tax-deferred and safe investment, this sounds like a great opportunity (so long as they can live without the funds for potentially a long time — which I can). As far as it being a great deal for the elderly parents, I can see no disadvantage to them — only benefit. Am I missing something? –Lisa
DEAR LISA: Sounds like a good plan — for you and your parents. However, before you enter into this transaction, I suggest that you consult a tax professional so that you (and your parents) understand the tax consequences. An attorney should also prepare the promissory note and the reverse mortgage document.
When a person (or couple) reaches the age of 62 and is considering obtaining a reverse mortgage from a commercial lender, he generally is required to have a meeting with a consumer credit counselor so that he fully understands the pros and cons of such a reverse mortgage. I don’t think that would be necessary in your situation. However, it might make sense to have your parents retain their own attorney, so as to avoid any potential claim that you somehow took advantage of your elderly parents.
DEAR BENNY: I have an older friend whose neighbor has approached her regarding doing a reverse mortgage. They want to acquire her property after her death or when she goes to an assisted living facility. She has a niece and two nephews who will inherit her estate when she is gone. They are not in a position to do a "family" reverse mortgage as you suggested.
My question is that my friend feels very comfortable with the honesty and integrity of the neighbor who suggested this, but is it a good idea? She said she would definitely go through a real estate lawyer to prepare the paperwork, etc. What is your opinion? –Betty
DEAR BETTY: As you can see from my previous answer, I advised the parents to get an attorney even though their children were going to lend them the money on a reverse mortgage. In your friend’s situation, while she may trust the neighbor, she definitely needs to discuss the entire situation with her own lawyer. If, for example, she would like to leave the house to her niece and nephews after she dies, that may not be possible under the reverse mortgage — or in the worst-case situation, the heirs may inherit a very large mortgage, which would have to be paid off to satisfy the neighbor’s loan. Keep in mind at all times that the neighbor wants the house.
DEAR BENNY: Can you direct me to a resource where I can find a list of the expenses that I can deduct from my gross profit on the home I have owned since 1976? –Sonia
DEAR SONIA: The Internal Revenue Service has issued a large number of publications that will tell you more than you really need to know about our federal tax system. One such publication is called "Selling Your Home" (Publication 523).
Additionally, the IRS just announced that it has just published a comprehensive tax guide for consumers, "Your Federal Income Tax" (Publication 17). According to the IRS, this document "has been updated with important changes for 2008, including information on the new recovery rebate credit, new first-time homebuyer credit, and an additional standard deduction for real estate taxes."
You can download it directly from the IRS Web site, or call 1-800-829-3676 to request a free copy.
DEAR BENNY: Our home is in the process of foreclosure. Bad economic times and the loss of work resulted in our failure to make two mortgage payments. The bank will not work with us to help solve this issue. What happens if a house is foreclosed by the bank? What are our responsibilities? Do we have to make up the difference in what is owed on the house? Your information will be greatly appreciated. –Louisa
DEAR LOUISA: I have been receiving many questions as to whether a homeowner who has been foreclosed upon has to pay any deficiency between what the house sells for and the then-outstanding balance. Unfortunately, each state has different laws; some completely disallow a lender from going after the homeowners who lost their house, while other states allow some form of deficiency. You will have to talk with an attorney in your state for this answer.
It is too bad that your lender will not work with you. But don’t give up. At a foreclosure sale, there are two possible "buyers." One is a third party who is the successful bidder. The other — which apparently is the norm now in today’s difficult financial market — is the bank itself.
Either way, you will have to move out of the house. I would recommend that you personally attend the foreclosure sale (no matter how traumatic this may be) to determine who will own your house. You may be able to negotiate a rental for a period of time, so that you can at least stay in the house for a little longer.
Before the foreclosure sale, have you exhausted all available options? Does your state have any laws or programs that can assist you? Have you talked with a real estate agent about arranging for a short sale? Or have you discussed giving the property back to the lender so as to avoid the foreclosure sale; this is known as a "deed in lieu" of foreclosure.
DEAR BENNY: My parents’ house is paid off. The house is in my father’s name only; my mother has his power of attorney (and I have hers). My father is in a nursing home, recovering from a stroke, but we do not foresee him coming home (he’s 86); he’s wheelchair bound, and conversant, though with some short-term memory problems.
My father’s last will and testament leaves everything to my mother. Is there any reason to get my mother’s name added to the deed? If so, what are the legal steps one should follow to get it done? If it is done, I assume it should be joint tenants with rights of survivorship? –C.H.
DEAR C.H.: Normally, I don’t recommend putting children on title with the parents, as there can be taxable consequences. In your situation, however, I think your suggestion makes sense.
While we don’t like to think about death, it is inevitable. When both of your parents die, whoever inherits the house will get what is known as the "stepped-up" basis. That means for tax purposes, the value of the house on the date of death becomes the new tax basis of the property.
Currently, when your dad passes, you will have to probate his last will and testament. However, if your mother is added to title as "joint tenants with right of survivorship", she will automatically own the house at that time, and probate will not be necessary.
Your mother should also have a will. In fact, in addition to a will, all of you should have a general durable power of attorney, a durable power of attorney for health, and a living will. Just make sure that your father is mentally competent at this time to prepare all of those documents.
An attorney can assist you with all of this.
DEAR BENNY: My husband and I are looking to purchase some homes for investment that are being foreclosed. Because many of these loans are the first deed of trust that are defaulted and the legal notice mentions nothing of second or third deeds of trust, if purchased at auction, who is responsible for additional liens taken out by the owner? –Lindsay
DEAR LINDSAY: While state laws may differ, in general, when the holder of the first deed of trust (the mortgage document) forecloses, it eliminates all subordinate liens.
Before you consider buying at a foreclosure sale, you must obtain a complete title report, which would indicate what liens and clouds are on the land records. Some tax liens may have a superpriority, and must be paid off at closing (escrow).
You should also make sure that you have inspected the house — inside and out– although many homeowners who are facing foreclosure are reluctant to open their house to strangers.
Too many of my clients have been burned when they bought property at a foreclosure sale. There is a lot of homework you have to do in advance of the sale, and I recommend that you get a tax professional and a lawyer to assist you along the way.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.